Sunday, February 9, 2014

Mulligan interview

Casey has done pioneering work looking really hard at how the ACA and other social programs work, figuring out exactly what their disincentives are, and calculating how much those disincentives are likely to affect people's decisions to work, go to school, and so forth.

This is hard work. Most of the punditocracy (I'm guilty too) sort of waves our hands at disincentives as a big source of economic malaise. Casey puts together the numbers. It's so much easier to just wave your hands about "demand," invent a multiplier, and conclude all our troubles would be over if the government would only spend so many trillions. Disagree with him if you like, but only by doing the same thing and coming up with different numbers.

I enjoyed the comments on last week's fracas, that when the CBO found a lot of people who will quit jobs they were only keeping for the health insurance,

...liberals [including official statements by Chairman of the Council of Economic Advisers, Jason Furman] have turned to claiming that ObamaCare's missing workers will be a gift to society. Since employers aren't cutting jobs per se through layoffs or hourly take-backs, people are merely choosing rationally to supply less labor. Thanks to ObamaCare, we're told, Americans can finally quit the salt mines and blacking factories and retire early, or spend more time with the children, or become artists.

Mr. Mulligan reserves particular scorn for the economists making this "eliminated from the drudgery of labor market" argument, which he views as a form of trahison des clercs. "I don't know what their intentions are," he says, choosing his words carefully, "but it looks like they're trying to leverage the lack of economic education in their audience by making these sorts of points."

That's putting it mildly. The rhetoric of our national conversation is strangely asymmetric, a point made beautifully by Peggy Noonan last week in a more political context. Imagine if, say, a Republican congressman said how great it was that lower and middle income people were quitting their jobs, so they could become artists. He would be pilloried as completely out of touch with the realities of life in middle America. What, has he been hanging out with former President Bush too much?

But to economics, Casey has it just right. When did the CEA become a spin machine, and willing to use economic fallacies if need be? There are a hundred disincentives to work in America right now. Job lock was a big problem with our employer-based health insurance system, and I've written against it too arguing for a system based on portable individual insurance. But as economists, we are supposed to look at overall distortions, understand that employer and employee distortions contribute equally, and that jobs represent two-sided matches. The idea that the full effect of government policy was to induce too many people to work is just silly.

Hey, work isn't fun. We do it for the money. If not for the money, for the health insurance. Sure, it would be great if the government would cover my health insurance, my food, gas, and housing, so I could devote myself full time to glider flying.

Update: In response to some comments, I guess I this point needs to be clarified. The incentive to work for health insurance does not exist in a vacuum. People quitting their jobs are not going home to take up art, live off their presidential-memoir income, and pay for their own health insurance. Casey's, and the CBO's point, is that the ACA lives on top of an alphabet soup of other programs and high marginal tax rates that give a disincentive to work.

Update 2: Focusing on who makes the decision -- it's ok because the workers chose to quit -- is a central example of abandoning economics to score a political point. A first theorem of economics is that it does not matter who pays the tax. The amount of bread sold, and the consequent change in surplus, is exactly the same whether the baker pays the tax and chooses to sell less at a higher price, or whether the buyer pays the tax and chooses to buy less and offer a lower price. The same point is true of employment. Now, as an exercise for the reader, go spot the same subterfuge in Alan Blinder's oped on the subject in Tuesday's Wall Street Journal.

A later zinger:

The larger betrayal, Mr. Mulligan argues, is that the same economists now praising the great shrinking workforce used to claim that ObamaCare would expand the labor market.

He points to a 2011 letter organized by Harvard's David Cutler and the University of Chicago's Harold Pollack, signed by dozens of left-leaning economists including Nobel laureates, stating "our strong conclusion" that ObamaCare will strengthen the economy and create 250,000 to 400,000 jobs annually. (Mr. Cutler has since qualified and walked back some of his claims.)

"Why didn't they say, no, we didn't mean the labor market's going to get bigger. We mean it's going to get smaller in a good way," Mr. Mulligan wonders. "I'm unhappy with that, to be honest, as an American, as an economist. Those kind of conclusions are tarnishing the field of economics, which is a great, maybe the greatest, field. They're sure not making it look good by doing stuff like that."

The article refers to Casey's papers. These are available at nber.org. I've been looking for ungated versions but didn't find them quickly. I've been meaning to write blog posts about them, but Casey writes faster than I can read them. Unlike some of my fellow bloggers, I've promised myself not to blog without actually reading what I'm blogging about, so that will have to wait a bit more.

27 comments:

"But as economists, we are supposed to look at overall distortions, understand that employer and employee distortions contribute equally, and that jobs represent two-sided matches. The idea that the full effect of government policy was to induce too many people to work is just silly."

But isn't there a substantial number of specific individuals for whom job lock IS the primary incentive for working? A 64 year old 1 year away from Medicare, as an example? Isn't that who we are talking about here? Employment to population ratio of 25-54 year olds is pretty low, but are those people the ones dropping out in the CBO forecast?

Why should this shrink the workforce? Don't the positions these people left still exist? If your secretary quits don't you need to hire a new one? This should be a wash, not a net decrease.

Seems to me this process induces someone who's just working for the health insurance to quit and make room for someone who needs a salary. How can anyone argue that "people are merely choosing rationally to supply less labor"? SOME people have made that choice. To make this theory work someone needs to show that there are more people quitting than seeking employment. Judging from the media stories where thousands of people apply for a handful of new jobs the number of people who are eager to supply labor far exceeds the marginal dropouts.

Good point, and I did stop short of a full supply-demand analysis. If droves of people quit, jobs are vacant, so wages must rise. I don't know if the CBO report got that far. How much wages rise depends on elasticities -- employer's ability to substitute away from workers, to pass on costs (product demand elasticity) etc.

People who cannot find employment have the incentive to learn new skills to create economic value in order to get paid a salary. People who currently have jobs do so because they currently create economic value, thereby justifying their salary.

So, in the case with the secretary that JB McMunn mentions, he creates economic value while the secretary-without-a-job discovers that she cannot get hired. So she decides to learn interior decorating, lands a new job and now both people are now creating economic value, meaning the economy should grow faster still.

If people quit in droves, the economy as a whole will grow slower then it would if those people stayed in their jobs and unemployed people developed more marketable skills.

Example: A 10-year employee quits. They have been getting annual raises all along. Now here comes an applicant who has been out of work for 6 months. You also have 15 applications on your desk from qualified applicants in similar situations. Actually, many are over-qualified. In the 30 years you've been in business you've never seen so many applications for this position.

These days you can't ask about marital status, children, etc, but you know that most Americans live paycheck to paycheck and have little or no savings. These people are desperate. There's little demand for them in the job market.

As an employer, what's your offer? Higher than the previous employee? I don't think so.

When more people quit their jobs and the unemployed continue to enjoy their unemployment benefits, employers will look to other countries for workforce. With fewer people to pay income taxes, corporate tax rate will be forced to increase. Then more businesses will seek outsourcing. The US economy will be going down for sure.

I believe the direction of the wage change is ambiguous in this situation. If crowds of workers (secretaries mentioned above, etc.) leave the labor force there will be many openings for new jobs. Does that necessarily mean that similar people in or out of the labor force will suddenly apply/compete for those jobs? If low-skilled workers are leaving the labor force in the first place, then what makes their decision framework different from those without a job? I don't know the answer to that question, but I don't think it is possible to wholeheartedly say wages will increase or decrease. As Dr. Cochrane states, these questions require a supply and demand framework for answers, but even then the answer may not be obvious.

The CBO is forecasting a net decrease in employment, not increased turnover with no net change. They're saying that this won't necessarily increase unemployment because people will voluntarily choose to leave, but nevertheless, they're predicting strictly fewer jobs.

As for why all of the jobs would not simply be refilled, it's because of the increased costs of employing people, thanks to Obamacare. The CBO assumes that eventually the full cost will be borne by the worker (i.e., lower wages), but that in the short run, not all of the costs will be passed on (due to both 'sticky wages' and the minimum wage) and thus some jobs will be eliminated. Presumably, they'll revise the estimated job loss upwards if the minimum wage is increased. Here's a section from the report:

Effects of the Employer Penalty on theDemand for LaborBeginning in 2015, employers of 50 or more full-time equivalent workers that do not offer health insurance (or that offer health insurance that does not meet certain criteria) will generally pay a penalty. That penalty will initially reduce employers’ demand for labor and thereby tend to lower employment. Over time, CBO expects, the penalty will be borne primarily by workers in the form of reduced wages or other compensation, at which point the penalty will have little effect on labor demand but will reduce labor supply and will lower employment slightly through that channel.

“The larger betrayal, Mr. Mulligan argues, is that the same economists now praising the great shrinking workforce used to claim that ObamaCare would expand the labor market.”

Along the same lines as Mulligan’s point, assume for a moment that James or Jane Goodfellow are participating in an expansive menu of social welfare programs such as food stamps, rent subsidy, Medicaid, etc. Further assume such transfer payments have an after tax value of $35,000.

In the main, James or Jane are low skilled workers. As low skilled workers James or Jane would need to land a $50,000 per year job merely to break even with an after tax value of $35,000 representing the transfer payments currently bestowed. What are the chances of a low skilled worker landing a $50,000 per year job? What are the chances of a low skilled worker, having in many, many cases been out of the work force for years on end, landing a $50,000 per year job?

Hence work, or as William Graham Sumner defined it, irksome toil, for $50,000 with an after tax value of $35,000 or avoid the irksome toil, accept transfer payments, and have the same after tax value of $35,000? Which is more rational?

Coming full circle, “….the same economists now praising the great shrinking workforce…”: are these same economists praising the welfare trap? Are these same economists implicitly advocating James and Jane should be happy for tax cliffs causing them to be caught in the welfare trap?

It used to be that the CEA and its head gave economic advice to the President and others on the team did the political sales job. I'm sure it was an devolutionary process, but the downward trend and transformation of the CEA into a marketing operation took a quantum leap here:

History repeats as a farcical parody whose players speak the same lines…

...liberals [including official statements by Chairman of the Council of Economic Advisers, Jason Furman] have turned to claiming that ObamaCare's missing workers will be a gift to society. Since employers aren't cutting jobs per se through layoffs or hourly take-backs, people are merely choosing rationally to supply less labor. Thanks to ObamaCare, we're told, Americans can finally quit the salt mines and blacking factories and retire early, or spend more time with the children, or become artists.

The above must be repeating 1845 again…

In communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticise after dinner, just as I have a mind, without ever becoming hunter, fisherman, herdsman or critic. - Karl Marx, German Ideology (1845)

There are several punchlines given history… (“a council” translated to russian is “a soviet”, the argument we are supposed to believe despite no one with a brain would, and calling them workers not employees, etc.)

“The rhetoric of our national conversation is strangely asymmetric”

Could be cause the system we are now copying is known to be a bit asymmetric? Not to mention, not so good with economics as a positive thing for the general population…

The larger betrayal, Mr. Mulligan argues, is that the same economists now praising the great shrinking workforce used to claim that ObamaCare would expand the labor market.

Karl Marx also predicted the whole human being society would eventually evolve into a utopian society. People will then do not need to work to earn their food, clothes, and so forth. The government will provide everything they need.

not if discouraged workers (often early retirees) stop looking for work and leave the work force (likely driver of unemployment drop when looking at employment numbers). Didn't someone once tell me the ACA wouldn't add to the deficit too? Were the 2 million people who were working / paying taxes that now receive subsidies in that, I think not.

Higher unemployment benefits (which ACA effectively is) improves the outside opportunity of workers i.e. makes unemployment more bearable. This increases the wage required to make someone accept a job. Consequently, absent fiscal multipliers, the ACA will cause unemployment to rise as fewer people accept jobs but will also cause wages to increase. We should also expect higher (employed) worker productivity, and a rising labour share of income.

Economic theory does not, I believe, tell us if total wages paid will rise or fall. Even more surprisingly, economic theory does not tell us if total gdp will rise or fall (econ 101 says it will fall but Acemoglu and Shimer 2000 say it rises) as a result of the (effective) increase in UI.

I do not know all the empirical evidence out there but you can find good empirical work arguing both directions for these effects. I do not believe that the direction and size of these effects have been resolved to the economic profession's satisfaction.

Given this, here is a claim:

Economists who are claiming that the ACA (or extended UI for that matter) is going to be bad for the working age population and growth are really speaking without scientific authority. Economists who are saying it will increase unemployment but are not mentioning a) the higher wages, b) higher productivity and c) uncertainty about the net effects on welfare are leaving out very important facts and cause listeners/readers to have inaccurate beliefs.

Employers don't have to hire domestic workers. They can hire workers from foreign nations. What I said above allows for this.

To be clear the number of jobs posted by companies should fall as a result of the higher reservation wage of US citizens. This in part will be due to employers hiring non-domestic workers. However, the average wages of working US citizens still goes up.

Thanks for the pointer. I found it pretty unpersuasive and unfocused. Casey was not doing a review of the ACA, just adding its effects to already large marginal tax rates. And differences to matter. If you face 100% tax rate and I face zero, our aggregate labor supply falls in half. If we each face 50%, a lot less. But thanks for the pointer, it is good to hear what Gruber has to say.

Gruber is right that Mulligan's analysis is really very one sided, I find it very frustrating. Mulligan claims that people are worse off just because they face high implicit marginal tax rates after the change. This is very poor welfare analysis and Gruber (and other commentators) seem not to have picked up on this.

A necessary condition for showing that these people are worse off is to show that they would be worse off after the implementation of the ACA even if they do not change their labour supply decision. I believe that Mulligan fails to even show this necessary condition holds, never mind the sufficient condition.

Of course, it could be claimed that the ACA is worse than other alternatives to the old system. Such as single payer health insurance systems or free at the point of access health services (or possibly JC's alternative that he proposed a while ago). In these cases we can raise the money with a low marginal tax rate over a broad base which is far more agreeable from the incentives perspective.

However, such policy's while popular with Democrats were very unpopular with Republicans. The ACA was a compromised solution and is an ugly little monster, but it is better than the monster before it. Perhaps there were better solutions out there but when it came down to it in 2008 the Democrats put "affordable health care for all" front and centre of their campaign. The Republicans made a passing nod to health care and it is only now that people on the right are coming up with solutions of their own.

Why was JC not pushing for his vision for a health care solution back in 2008? Probably because the Republican's didn't really want one and so, even if JC were trying to push his solution, there was no platform for him to speak from. Now that the Republican's are very interested in scuttling or discrediting the ACA there is more demand from the right for better alternatives to the ACA.

Poor K, he feels Casey didn't quote him correctly or read his work carefully enough, and feels insulted that Casey insinuates he does not know econ 101 first principles. But Casey only rates "stupid" not "mendacious idiot" so that's praise.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.

About Me and This Blog

This is a blog of news, views, and commentary, from a humorous free-market point of view. After one too many rants at the dinner table, my kids called me "the grumpy economist," and hence this blog and its title.
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!